Does economic uncertainty hinder or help business profit? Evidence from Indonesia’s commercial banking industry

Abstract

Purpose This study aims to explore the impact of instability on bank performance by examining how economic uncertainty interacts with the profitability of both Islamic and conventional banks (CBs) in Indonesia. Design/methodology/approach This study applies a quantitative methodology, applying dynamic linear analysis through autoregressive distributed lag estimation and leverages time-series data from Indonesia’s banks. Specifically, bank profitability is measured using income before taxes, whereas economic uncertainty is gauged by weighting macroeconomic factors through principal component analysis. Findings Economic uncertainty affects the profitability of both Islamic banks and CBs in Indonesia, with CBs being more negatively impacted than Islamic banks. Research limitations/implications Economic uncertainty has a notably different impact on banks’ profitability in Indonesia, highlighting the critical need for stabilization measures to reinforce the foundations of the financial institution management system and integration policy frameworks. Practical implications Strengthening the management of integration policies should be prioritized to enhance financial stability in larger banks during economic uncertainty. Policymakers should focus on the profitability of CBs during periods of economic uncertainty as it has a bigger impact than the Islamic banking industry. Originality/value This study underscores the importance of sustainable development strategies in enhancing banking performance during periods of uncertainty. At the same time, studies examining the relationship between economic uncertainty and bank profitability remain limited, particularly when comparing Islamic banks and CBs in Indonesia.

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